The cost of failing to finalise the terms of that contract!

The case of Arcadis Consulting (UK) Ltd v AMEC (BSC) Ltd [2016] illustrates why it is so important to finalise the terms of a contract and sign the documents rather than leaving them in the bottom drawer to be resolved at some point in the future.

Arcadis, had done design work on two large projects for Amec’s Buchan subsidiary. This was done in anticipation of agreeing a wider framework agreement that never materialised. Despite not agreeing the detailed terms of the contract, Buchan still placed the order and Arcadis undertook the design work on the two projects.

Buchan claimed there were defects in a multi-storey car park and the cost of rectifying these defects was £40m. Arcadis claimed its liability was limited to £610,515, which was a figure that Buchan had put forward in contract negotiations. Overall Arcadis was paid £285,000 for the design work making it easy to see why they would want to establish that their liability was limited to £610,515 when faced with a potential £40m claim.

Was there a contract and, if so what were its terms?
The Court decided that the parties had been negotiating the terms of the contract but there was clear evidence that they had not reached a final agreement. However, it decided that a contract was entered into. This was a case where work was done and paid for on the basis of instructions from Buchan, which were accepted. The other terms being discussed did not form part of the agreement to carry out the work.

Issue Two – if there was a contract was the limit on liability included in it?
Whilst the parties had discussed and agreed in principle during the negotiations and draft documents that there would be a limitation of liability, the actual terms had not been agreed meaning there was no limit on liability where there was a breach of contract. For a limit on liability to exist there must be a clear and express agreement as to how and when such liability is limited.

Lessons to be learned – finalise the terms of that contract!
The judge commented that “This case starkly demonstrates the commercial truism that it is usually better for a party to reach a full agreement (which in this case would almost certainly have included some sort of cap on their liability) through a process of negotiation and give-and-take, rather than to delay and then fail to reach any detailed agreement at all.”